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This market report discusses the fluctuations in foreign exchange rates, central bank policies, and potential economic developments in key global economies in late January and early February of 2025. Here’s a brief overview:
US Market:
- Trump’s Tariff Threats: Initially, there was significant volatility in the foreign exchange market due to tariff threats, though the market adjusted as these were seen as negotiating tactics.
- US Economic Data: The Federal Reserve is expected to remain on hold, with little to no changes in policy until mid-year. The main focus is on the PCE deflator, with economists predicting a slight acceleration in inflation. The fourth-quarter GDP is expected to show a solid 2.6% growth, and personal income and consumption data will be closely watched.
- Currency Trends: The US dollar showed a weakening technical tone after January 13, with momentum indicators turning negative. The Dollar Index dropped, and further downward movement is expected toward the 105.25-106.35 range.
Eurozone (EMU):
- ECB Policy: The European Central Bank is expected to cut rates by 25 basis points to 2.75% at the January 30 meeting. Market expectations are for additional rate cuts throughout the year.
- Economic Data: The Eurozone is likely to show marginal growth in Q4 2024, likely under 0.2%. The euro’s movement will largely depend on US dollar fluctuations. The euro’s technical outlook suggests it could reach $1.0560-75, but a drop below $1.0375 would signal a reversal.
China:
- Exchange Rate Management: China’s government has maintained tight control over the yuan’s value through daily reference rates and liquidity management. Despite tariff threats, China has prevented significant depreciation of its currency.
- Economic Data: China’s official PMI and Caixin manufacturing PMI data will be important, but with the Lunar New Year celebrations coming up, there might be a temporary disruption in activity.
- Currency Outlook: The yuan strengthened against the US dollar, with the greenback’s lowest level since November 2024 around CNY7.23. A technical retracement around CNY7.2170 is also possible.
Japan:
- Monetary Policy and Economic Data: Japan’s BOJ is expected to remain on hold after a recent rate hike. Tokyo’s CPI for January could see accelerated inflation, but broader economic impacts are expected to be minimal.
- Currency Outlook: The USD/JPY has been range-bound between JPY154.80 and JPY156.75. The key technical support level is JPY154.80, and a move below this could signal further yen strengthening.
UK:
- Sterling: The pound has seen a 3% gain since mid-January, recovering from lows in September. While domestic economic conditions remain weak, much of the negative outlook for the UK has already been priced in.
- Data/Events: The Bank of England is expected to cut rates by 25 basis points in the coming meeting, but future rate cuts seem to be priced cautiously by the market.
- Currency Outlook: Sterling may continue its short-covering rally, with the next resistance around $1.2575.
Canada:
- Bank of Canada: The Bank of Canada is expected to announce another rate cut by 25 basis points on January 29, following aggressive easing in 2024. Political uncertainty could also play a role in Canadian markets.
- Currency Outlook: The Canadian dollar has seen volatility due to US tariff threats, but the broader trend suggests further weakening of the USD/CAD pair toward CAD1.42.
Australia:
- Economic Data: Australia’s Q4 CPI data is due on January 29, with expectations of softer inflation readings, possibly signaling that the Reserve Bank of Australia may begin easing in February.
- Currency Outlook: The Australian dollar has strengthened, reaching key technical resistance levels at $0.6400 and $0.6440.
Mexico:
- Economic Concerns: Mexico faces vulnerabilities due to potential US tariff measures and domestic political instability. The trade balance with the US has also drawn scrutiny, with a growing surplus in favor of Mexico.
- Data/Events: Economic growth slowed in Q4 2024, and a more sustainable growth path is anticipated for Mexico in 2025.
- Currency Outlook: The Mexican peso has gained strength, recovering from losses earlier in the month, with a new low for the month against the dollar near MXN20.1350.
Overall Summary:
- US Dollar: The US dollar is weakening across most major currencies due to mixed economic signals and the political situation.
- Global Central Bank Actions: There’s a divergence between global central banks, with the ECB and Bank of Canada expected to cut rates, while the Federal Reserve is likely to remain on hold. Other countries like Japan, the UK, and Australia may also see continued monetary policy adjustments.
- Currency Outlook: Most currencies are currently in corrective phases against the US dollar, but volatility remains high due to geopolitical tensions and domestic economic factors.
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